Experian Ventures’ Alex Marquez: ‘We want to be a listening post’

After 18 plus years in corporate venture capital, credit bureau Experian brought in Alex Marquez last year to launch their own investment vehicle. While the firm has been pretty acquisitive throughout its history, this was a new initiative for the firm as it invests in innovation.

On this week’s Tearsheet podcast, Marquez joined us to discuss Experian’s investment mandate and how he measures the success of his corporate venture program. We also talked about how the investment side integrates into the firm’s larger strategy.

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Below are highlights, edited for clarity, from the episode.

Why was Experian interested in corporate investing?
I was brought in to build this program from scratch. Experian is probably better known for being an acquisitive company. They’ve acquired quite a few companies over the past 10 years. Historically, their mandate has been to grow inorganically through acquisition. Experian Ventures is a complement to the traditional acquisition path. We want to be a listening post for all the innovation and disruption happening within the traditional financial services space. The ultimate goal is to provide a greater view and vantage point as the eyes and ears of the organization.

Connecting venture with innovation programs
In theory, a lot of what we get from the investment side is a result of strategy. Strategy leads execution and we have a variety of strategies across our business units. We have a data lab that we announced several years back. It’s a sandbox, an environment to innovate with our existing client base. It’s a resource for us, as well as a playground for larger clients. We also do hackathons with the startup community.

We also have general innovation efforts across the globe. We have innovation centers in U.S., Europe, and Southeast Asia that reach out to the startup community. A bit of it is informal because the network is new for us. I’m the sole person within the ventures group, so I leverage and rely on my colleagues across the organization who have similar and related efforts and initiatives with the startup community.

Were there cultural changes that had to happen for Experian Ventures to work?
It all starts with communication. Investments were previously done through the mergers and acquisition group. As our communication has grown over the past six to eight months, it’s been quite successful in generating ideas and deal flow from the thousands of people we have in the field, whether they’re on the digital and innovation side or whether they’re in sales. Part of the cultural change was understanding broadly that we’re now also investing in companies in addition to partnering with and acquiring companies.

MassMutual Ventures’ Doug Russell: We want to become more innovative as a firm

We’re continuing on our series of interviewing top corporate venture capitalists in the finance industry to get their perspectives on where things are headed by looking at where they’re investing.

Today’s guest on the Tearsheet Podcast is Doug Russell, managing director of MassMutual Ventures, which began in July 2014 as a VC arm for the insurance giant. We talk about his experience as an operator before moving into a corporate investor role and how that influences his investment practice.

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Below are highlights, edited for clarity, from the episode.

Why should an insurance company create a venture arm?
“The decision to start the fund arose from management’s focus on ways we could become more innovative as a firm, recognizing all the changes that are happening outside our business with respect to technology and customer expectation.

I had been in the seat as head of strategy and M&A and was fortunate to be asked to lead this effort. A year into investing, we realized that there was a tremendous amount of activity and really interesting deal flow, so I transitioned to move into the fund full time.”

Is there a value in having a lot of operational experience as an investor in insurance?
“In making a decision to bring on two partners to our fund, we identified two people with significant venture investing experience. With that came good reputations and history working with companies and other investors. Together with my background on the operational side, we felt we were building a very formidable team that would be viewed favorably in the entrepreneurial and investing worlds.”

How does venture investing fit into MassMutual’s objectives?
“Our $100 million fund has one limited partner, MassMutual’s general investment account. Our primary mandate is to generate returns in the top quartile of 2014 vintage funds. Our secondary approach is to generate strategic insights into the MassMutual ecosystem. We meet a number of companies as part of our work and even companies that don’t fit our investment criteria can get introduced into the MassMutual ecosystem.

We’re a large U.S.-based insurance company with an insurance, retirement, and asset management businesses. We have operating, distribution, technology, and cybersecurity teams. Our parallel mandate is to provide strategic insights through introductions and a quarterly discussion around the trends we’re seeing in the market.

Lastly, where it makes sense, we also enter into commercial relationships with our portfolio companies. About a third of our investments have entered into partnerships with us, but the primary mandate is still to drive investment returns.”

Give an example of a portfolio company.
“Check out Tuition.io. Think of it as a business that provides a 401(k)-like benefit for student debt repayment. It’s a match on student debt repayment by an employer. One of the great challenges in today’s market is attracting and retaining talent. The outstanding student debt has gone from a few hundred million dollars 10 few years ago to over a trillion dollars today. The average student has around $35,000 in debt. So, when you join a company that uses Tuition.io, it would have a benefit to student debt paydown match at a certain level over a few years.

We also invested in CyberGRX. It’s like an S&P rating of a company’s cyber risk. SMBs may not have the ability to assess the cyber risk of potential partners and this technology plays into the growing investment trend in defensive cyber capabilities.

We invested in PolicyGenius a couple of years ago. It’s a digital distribution business that can engage with customers in different ways and provide streamlined solutions across the insurance spectrum, beginning with term life insurance products. This is an example of an investment in a company that theoretically could compete with MassMutual but we see the potential of putting our products on their platform in the future.”

Banks push the envelope of innovation, but not alone

Financial institutions are more and more aware that they need to lead in innovation. Rather than shutting startups out to secure their position, banks are opening up and inviting startups in.

Santander Group announced this week that it had raised another $100 million for Santander InnoVentures, its London based fintech venture capital fund.

Since inception in 2014, the fund has already invested globally in startups in digital identity, wealth management, blockchain, online lending and payments.

Santander isn’t the only bank with a corporate venture capital arm meant to foster startups and technologies that can provide banks with a competitive advantage. Barclays operates a network of fintech-focused accelerators in the U.S., Europe and Africa. Citi runs Citi Ventures and BBVA operates Propel Venture Partners, formerly BBVA Ventures.

What’s is next for the banking industry?

What will the banking industry look like in 5 or 10 years? What trends do banks foresee?

To identify which trends banks think will shape the future of finance, we analyzed over 100 startups backed by VC arms of big banks by sampling data from the investors’ own websites.

Looking at bank CVCs only provides part of the picture on future trends, as banks can swallow and incorporate innovative private companies through private equity arms or through mergers and acquisitions.

Lending related startups are the biggest group of companies (12%) backed by banks’ venture funds. Not surprisingly, cybersecurity and IT infrastructure are the next largest cohort (11%). In an industry powered by trust, banks can’t afford to be a single step behind the hackers.

Analytics and big data solutions that enable banks to better serve their clients with products and services were next (10%). Other notable categories include payments (10%), blockchain technology (8%), and authentication, identity management and fraud prevention (8%)

Wealth management and personal finance platforms, marketing tech and user experience also received investment from the financial industry’s corporate venture capital arms.

This data set isn’t perfect. It does, however, offer a glimpse into the collective psyche of banks in regards to the changing landscape.

Investing in millennials

Ph.Ds will be written about millennials and generations to come: Their mobility — geographic, in the job market, in the way they communicate, purchase and do business — is already established as one of their pivotal traits.

Banks are capitalizing on this mobility and reacting to it. By exploring new ways of financing, enhancing the hardware and software the global economy relies on and leveraging the vast and profound data sets this mobility produces, banks are making sure they will stay ahead.

On the big data side, many banks use IBM’s cognitive computing platform, Watson Analytics, to better analyze customer data. This allows a bank to better understand the value of its customers and build tailored offers, credit lines and marketing campaigns. Clients include BBVA, Citi, Standard Bank and ANZ bank.

Japan’s Mizuho Bank has deployed robots supercharged by IBM’s Watson in several of its branches, bringing AI out from the shadows.

On the UX side, banks are expanding their mobile offerings, continually adding more services to their online and mobile platforms. Santander, for example, also operates Openbank, a branchless bank in Spain.

Collaboration, not disruption

Banks can’t innovate alone. Saddled with legacy systems, heavy regulations and cumbersome workflows, banks just can’t move as fast as startups. But startups, in turn, need the banks…The future is about partnerships.

BBVA, for example, launched Innova Challenge, an initiative that promotes open and collaborative culture between the bank and developers, with the aim of including a larger community in creative and technological development. BBVA opened its platform to the developer community through an API. Citi also opened up its APIs to developers through its Citi Mobile Challenge.

“Many fintechs have succeeded but today they are still operating only at the edges of banking,” explains the Santander Group in a recently published white paper about the future of fintech, titled Fintech 2.0. “To help engineer more fundamental improvements to the banking industry, they must now be invited inside, to contribute to reinventing our industry’s core infrastructure and processes. That can succeed only as a collaborative endeavour, with banks and fintechs working together as partners.”

Santander explores a few problems in the financial industry that startups and banks will need to work together to solve. Among them are streamlining processes by leveraging data gathered by connected devices, embedding distributed ledger technology (blockchain) and creating frictionless processes for the consumer.

Funny enough, Deutsche Bank also recently published a white paper under the same title and a similar theme, though focused on payments.

“The time has come for one further change,” writes the German bank, “a shift in mindset from one of competition to collaboration. By exploring strategic partnerships, traditional banking providers and new innovators can together create long-term success and revolutionize the payments market and wider financial sector for the benefit of all.”

The banks are calling for more collaboration. Will startups follow?

Photo credit: Román__PG via VisualHunt.com / CC BY-NC-SA